Textron: Buy the Rumor, Buy the News

By Ben Levisohn

The rumor, in this case, was that Textron would buy Beechcraft, which was first reported last week–and shares of Textron gained 14%. The news today that the rumor was indeed true, however, hasn’t prevented Textron’s shares from staying aloft.

Textron Inc. agreed to pay $1.4 billion to acquire Beechcraft Corp., a deal that would combine the small U.S. plane maker into an industrial conglomerate that also produces Cessna planes and Bell helicopters.

The planned acquisition comes 10 months after Beechcraft exited Chapter 11 bankruptcy protection under the control of several hedge funds that converted their debt into equity, including Bain Capital’s Sankaty Advisors, Angelo Gordon & Co. and Centerbridge Partners. The bankruptcy filing last year was prompted by a prolonged slump in sales and a heavy debt load following a leveraged buyout in 2007.

The deal unites two of the best-known makers of small business aircraft, demand for which collapsed in the global recession. Textron’s Cessna unit and Beechcraft, both based in Wichita, Kan., each have made deep job cuts and shrunk production in recent years in response to the slump.

Company expects 20c of 2014 annualized accretion from the addition of the business, including $65m of synergies. This excludes one-time charges of ~35c in 2014. Accretion is expected to increase to 25-30c in 2015 as synergies ramp to $75-85m coupled with limited growth in the underlying portfolio. This is relatively in line with our conservative estimate of ~20c of EPS accretion in 2015.

Although accretion levels are in line with our expectations, they’re more dependent on synergies than our initial analysis assumed. We had assumed 200 bps of synergies to arrive at our 20c estimate, while TXT appears to be baking in ~400 bps of synergies in the out-years. This implies weaker underlying Beechcraft margins…

Despite potential accretion of 25-30c outlined below, we’re still on the sidelines given continued pressure in the bizjet & general aviation markets.

Shares of Textron have gained 1.2% to $36.63 at 1:09 p.m., while Embraer (ERJ) has risen 0.5% to $32.30, Triumph Group (TGI) has advanced 0.2% to $75.73 and Spirit AeroSystems (SPR) is off 0.8% at $33.90.

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Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.